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December 7, 2006


For no particular reason I could identify, equities started heading south about ten minutes after gapping up on the open and never managed to gain any significant traction. Major indices closed at or near their lows, with the SPX losing almost a half percent, and the NDX off over one percent. The action certainly feels like exhaustion is afoot, but as always, it would be nice to see some follow-thru.

The weakness inspired me to begin reloading the shorts I shed last Friday. I began by selling some SanDisk because its chart looks like it could warp into total meltdown. Given the burgeoning horror stories about the sub-prime lending market, I was also looking to add to my positions in that arena. My primary targets were Washington Mutual and Countrywide Financial. WaMu seems like such a wonderful short candidate because it has woes on many fronts. The bank has high exposure to the California residential market. Their purchase last year of Providian, a higher-risk credit card company, seems particularly poorly-timed. Also, management has been less than astute at performing the all-important task of duration matching with their loan and deposit portfolios. All these factors have been previously discussed in this blog.

Countrywide has high exposure to sub-prime and other risky mortgages. In the face of the housing meltdown, I am surprised the shares have managed such a strong rally from the summer, but I have fortunately avoided exposure. However, I like the bearish divergences showing up on the chart, along with today's high-volume reversal.

Anyway, back to trading. I placed bids for put options on both WM and CFC, but only got filled on the Countrywide order. Both stocks fell precipitously in the afternoon, making my CFC put purchase look brilliant, but making me look too picky with regard to WM. As luck would have it, WaMu shares unexplainably rallied in the closing minutes to close even for the session. I will continue to stalk that one for an entry.

Another encouraging sign developed in metals today. We saw upside reversal in both gold and silver. Silver recovered from a 13c loss to gain 30c, while gold reversed from a $7 loss to close fractionally higher. Miners followed suit and are looking healthy enough to put in another solid leg up from here. One barometer I have been watching is the action in Newmont Mining. Newmont has certainly been an under-performer during this bull market, so if it manages bullish action, the whole sector is likely to be doing well. I was hoping NEM shares could resolutely take out resistance at $47.60, but after touching that level today, they pulled back. Well, there is always tomorrow.

Disclosure: Short SNDK; Long SNDK, CFC Puts; Long NEM; Long NEM Calls


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